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Business, on the whole, likes democracy. It gives people and companies freedom to buy their products and their stock. Democracy loves businesses too because, fired up by the profit motive, they tend to find the most efficient way of producing the economic growth that all nations need to thrive. But chief executives and democratic systems are uneasy bedfellows, as organisations from Britain’s Co-operative Group to the mighty Pentagon have discovered to their cost.

Take the Co-op. The father of co-operative movements worldwide, this British institution celebrated its 150th anniversary last year but is spiralling out of control, with losses from a disastrous banking merger and the drugs and sex scandals surrounding former Co-operative Bank chairman Paul Flowers (see earlier post: When The CEO Has a Serious Drug Problem) threatening its very future.

Euan Sutherland, who joined the mutual as chief executive in May 2013, wanted to shake things up, selling off disparate parts of the groceries-to-funeral-services conglomerate and introducing disciplines from the capitalist rulebook to the mutual organisation. He also wanted a corporate-style pay package but faced opposition to that and to his reforms from the Co-op’s old guard. Now he has resigned.

“Euan Sutherland’s resignation is the product of stand-off between democracy and managerialism,” says Andre Spicer, professor of organisational behaviour at London’s Cass Business School. “Sutherland wanted to introduce typical managerial reforms such as restructuring, selling off parts of the firm’s portfolio of businesses, and streamlining governance procedures. This would have made the Co-op look very similar to more mainstream businesses. Traditionalists in the group want to preserve the values of democratic decision-making, and the slow and often unwieldy processes this entails.”

John Thanassoulis, professor of financial economics at Warwick Business School, goes further. "This represents a clash of cultures between the members’ ownership model of the Co-op and the more dispassionate business decision making required of a plc,” he says. "The Co-op is unusual in that its board is entirely made up of elected members. The new CEO wishes to sell off parts of the Co-op - the farms and potentially the pharmacies. This will affect some of the members very directly. The broader question here is does the ownership model of the Co-op allow the elected members on the board to rationally decide on the greater good? Or do the considerations of the constituencies they represent trump the broader business imperatives?"

Iraq: winning hearts and minds? (Photo: The US. Army)

Paul Brinkley came up against this kind of conflict on a much grander scale during his five years as the top-ranking official at the US Department of Defense in charge of economic rebuilding. Reporting to Secretary of Defense Robert Gates, Deputy Under-Secretary of State Brinkley was in charge of overseeing economic improvement in Iraq and Afghanistan. Entrusted with quelling the terrorist threat by bringing democratic, capitalist and business structures into cultures that had not previously known them, his taskforce created thousands of jobs in areas that others had written off as hopeless.

In his just-published book “War Front to Store Front,” however, Brinkley writes that much of this effort was in vain and when I interviewed him recently, he was pulling no punches, asking what kind of macroeconomic return has been generated from the $1 trillion dollars spent, 40,000 casualties and more than 4,000 US deaths in Iraq since 9/11 and the $700 billion ploughed into Afghanistan.

“We’ve had in mind for the last decade or more that if we can just create democracy and allow elections to take place, good things will follow,” he says. “I think we have that completely on its head. The reality is that democratic institutions are sustained by a middle class and a middle class is sustained by an economy. If you don’t have an economy, you’re not going to be able to sustain democratic institutions.

“In no place is that more glaring than Afghanistan, where we have extremely fragile institutions built on an economic base that’s woefully insufficient. They’re not able to pay for their own government, they’re heavily dependent on foreign aid and now the mission is ending, And so we have a set of democratic institutions that are resting on a house of cards ….and I don’t have optimism that those institutions are going to be sustained. There’s not an economic base on which to sustain Afghanistan’s military and ongoing development, education and health needs. Some 60pc-70pc of Afghan GDP is dependent upon foreign aid. That’s not going to maintain at current levels and when the military withdraws, the agencies administering aid are not going to stay if the violence increases. When you pull that amount of economic activity out of a country, you create the kind of hardship and squalor that creates a breeding ground for radicalism.”

Brinkley believes that, instead of trying to manage all this from Washington, America should have created the kind of institutions that implemented the Marshall Plan after World War Two and introduced tax credits and other incentives for US companies to invest directly in business in Iraq and Afghanistan. It didn’t happen, he says, because governments and the military didn’t trust such quangos, seeing them as anti-democratic, non-transparent and unaccountable.

On a wider basis, Brinkley believes a dichotomy has emerged between Americans’ expectations of the private sector, compared to what they tolerate from the public sector and its increasing reliance on the military. “Any time the US has a crisis of any consequence, from the oil spill in the Gulf or Hurricane Katrina, we only breathe easy as a country when we put a military man in charge,” he says.

“A guy with stars is put in charge and we know somebody competent and results-oriented is taking care of the problem. So we have a private sector that does amazing things and has managed to create not only wealth and prosperity at home but in many parts of the world. And we have a uniformed military which is a performance-oriented, objective-oriented and accountability-managed organisation.

“You have this chasm between what the military does and how it manages performance, holds people accountable and incentivises appropriate outcomes, versus a civilian bureaucracy that really doesn’t have that culture. And business is probably more extreme than the military. In private sector business in a globalised economy, you don’t survive if you don’t have agility and are not able to compete, innovate or manage performance. So our civilian governments are a kind of bubble, protected from many of the forces that they’ve put in place that have made the private sector sometimes painfully efficient. They’ve not applied that to themselves.”

What are the lessons? Business has now had more than a decade of being told to disband command and control mechanisms in order to empower and enable their workforces, who are then made strictly accountable for any failures. And our Western governments have for at least the past 35 years been trying to take commercial mindsets to solving social problems. Can they both be wrong?